I'm not worried that video storytelling will go away--we're
watching more video all the time. I'm just concerned about the
incumbent TV business. As in, the "network" and "pay TV"
industries that have made so many TV industry executives and
shareholders so wealthy over the past 7 decades.

The TV industry, it seems to me, is at the same place the
newspaper was a decade ago: User habits are changing--we're
getting our "shows" and news from other sources than traditional
networks and TV distributors--but this change has not yet been
felt in the TV business.

The newspaper business held up for almost a decade after the
Internet first started eating into it. But then, all at once, it
collapsed. I think the TV business may be headed for the same
fate.

I got lots of feedback on my article, from wholehearted
agreement to dismissive disagreement. Dan Frommer of Splatf, for
example, wrote a smart
rebuttal here. And a TV equity analyst named Brian Wieser at
Pivotal Research Group has now addressed my argument point by
point.

Brian has been kind enough to allow me to share his whole
report with you. So here goes (I'll weigh in with some
counter-point in a future post).

The Death And Life Of TV
by Brian Wieser
Senior Research Analyst
Pivotal Research Group

BOTTOM LINE: The death of TV has been predicted
with regular frequency. We’re aware of prophecies of doom
which date back at least to the 1970’s when fears of “zipping”
(fast-forwarding with a VCR) and “zapping” (changing channels
with a remote control device during airings of commercials)
suggested the end of the commercial TV model. While future
life is never assured for any business, evidence put forward
regarding the limits of television (and TV advertising in
particular) tend to ignore what we have observed are its key
drivers. For our area of focus, advertising, those drivers
relate to the sustained presences and continuous emergence of
oligopolistic categories of marketers who differentiate
themselves from their direct competitors by virtue of the
awareness of attributes they generate uniquely via
television.

In our universe of coverage, CBS is largely dependent on the
prospects of health for the television industry in the United
States and around the world. Our view on television
advertising is a core underpinning to our BUY recommendation and
$37 price target on the CBS stock.

-----------------

One of the most detailed pronouncements on what we characterize
as the “death of TV” was published last week on Business Insider, Henry Blodget’s online
media/technology-focused publication. The depth of the
article certainly aroused more than a little attention among some
of the investors and industry contacts we interact with. (Article
can be found here: http://www.businessinsider.com/tv-business-collapse-2012-6)

While the article is certainly thoughtful and among the most
detailed we have read on the topic, we fundamentally disagree
with many of the article’s underlying data points and related
conjecture. Thus we also disagree with the conclusions. Given the
interest and queries which came our way, we thought you would
find our critique of the article to be of interest.

Blodget’s article begins with observations of the newspaper
business, well-summarized with a chart highlighting the decline
of the business on an inflation-adjusted basis from a peak of $60
billion in inflation-adjusted advertising revenues in 2000, and
closer to $20 billion by 2011. His narrative is the one part of
the article we generally agree with, albeit with some exceptions.

“The digital audience stopped using newspapers as a
reference and source for commerce. They browsed oneBayandCraigslistinstead of
reading classifieds. They got their movie news from movie sites.
They got real-estate listings from real-estate sites. They
learned about "sales" and other events from email and coupon
sites. And so on….newspapers were screwed. It just took
a while for changing user behavior to really hammer thebusiness.”

In our view, newspapers were hit by a few items over the time
period in question. First, the classified market got whacked by a
free alternative, Craigslist, leading to an evaporation of that
segment (down from $20 billion to $5 billion between 2000 and
2011 in absolute terms).

Second, the primary segment of marketers that relied on
newspapers – small and local brands – increasingly became
regional and then national, and thus prioritized national media.
Retail advertisers and national advertisers’ traditional
newspaper advertising fell from $27 billion to $15 billion over
the same period, 2000 to 2011, and their transition away from
local advertising contributed a significant share of the decline
(advertising in local media fell from 63% of mass media
advertising to 50% of mass media advertising during this period).

Third, many other emerging small and medium sized marketers
prioritized paid search, limiting the prospects for a rebound in
either of the above sources of revenue regardless of changes in
consumer trends in any direction.

Thus, we would argue that declining consumption and changing
behavior was part of the story, but not the only factor hurting
newspapers. Arguably, the same trends which hurt newspapers have
benefitted television given its prominence among marketers whose
business goals are assessed at a national level.

Blodget’s specific points about television are more debatable,
even as they resonate with many of the investors and industry
practitioners we interact with.

“We almost never watch television shows when they are
broadcast anymore(with the very notable
exception of live sports)”

This assertion is not representative of the broader population.
Across the entire universe of DVR-using households, Nielsen’s
monitored panel establishes estimates that approximately 17% of
TV viewing occurs on the DVR; thus 83% of viewing occurs on a
live-basis in those homes. Across the entire population, as only
slightly more than 40% of the population has a DVR, approximately
93% of total viewing is live, and we can be virtually assured
that almost everyone watches some live TV over the
course of a month.

Some extrapolation from these and other data points highlights a
more important truth: live viewing is cumulatively up over the
past decade. In other words, what was once the most dominant
medium remains dominant, and by a significant margin.

To illustrate, the average person watched 29 hours of programming
per week in the 1999-00 season and 34 hours during the 2010-11
season. Across the entire population of 295 million adults, this
equates to 10 billion person hours of annual TV consumption in
2010 vs. 7 billion person hours in 1999-2000 given a population
base of closer to 246 million. In other words, total TV
consumption has grown by approximately 40% with only 7% of it
eroded by DVRs. Even in homes with DVRs, assuming the average
consumption levels are similar in homes with and without DVRs,
more live consumption occurs today than did a decade ago.

“We rarely watch shows with ads, even on a DVR”

We would argue most people don’t notice when they are exposed to
most ads. The reality is that most TV is consumed in a passive
manner, and often TV is a secondary activity, with consumers
focused on other endeavors. That doesn’t mean the ads consumers
are exposed to under such circumstances are ineffective (if a
consumer can hear a commercial or sees it muted, there is still
some impact). Notably, the percentage of ads viewed while DVRs
are in playback mode has risen over time as the hard-core ad
skippers account for a smaller and smaller share of the
DVR-owning universe.

“We watch a lot of TV and movie content, but always on
demand and almost never with ads(We're now so
used to watching shows viaNetflixoriTunesorHBOthat ads now seem like
bizarre intrusions).

Traditional TV content still dwarfs consumption on other
platforms; ad-supported content is still the dominant form of
traditional TV content (PBS and premium cable account for a very small
share of total viewing)

“We get our news from the Internet,
article by article, clip by clip. The only time we watch TV news
live is when there's a crisis or huge event happening somewhere.
(You still can't beat TV for that, but soon, news networks will
also be streamed).”

TV news still drives audiences at a local
level. It certainly drives political advertising. At a national
level, Fox, CNN and MSNBC remain large and usually growing
businesses.

Empirically, this would not appear to be correct. Until recently,
Nielsen published data indicating that most consumers would view
around 20 channels in the course of a month, and the number of
channels tended to rise with time (and fragmentation, which
resulted in more choices appealing to divergent audience niches).

Further, assertions regarding preferences around a la carte
programming tend to presume that pricing for television channels
would be pro rata their current costs. This would clearly not
happen. Programmers would incur new marketing costs (which they
would seek to make up) as they chase subscribers; further, an
entire paradigm of advertising would change in an a la carte
world such that advertisers would shift budgets to free-to-air
broadcasting (or other similarly broad-reaching programming).
This means that most of the most popular programming on today’s
cable programming could only survive with per channel pricing
that is multiples higher than many consumers would anticipate.

“…Our type of household may still be in the minority, but
we won't be for long. And our type of household is the type of
household that many advertisers and TV networks want to reach.
We're still in "the demo" (24-55), and we're still buying a lot
of stuff.”

This isn’t necessarily the case. As DVRs penetrated broader
audiences, consumption of recorded programming fell largely
because marginal adopters of DVRs tend to be marginal users.
Those who have the most aggressive/in-control viewing behaviors
were early adopters. Further, there is no reason to assume that
DVRs or on-demand access to content becomes as pervasive as
conventional, traditional television (at least in an investable
time horizon). The United States is a country whose income
disparities are widening. We suspect lower income populations
will be less likely to pay $13.95 per month for DVR service than
those with higher incomes.

To that point, advertisers seeking higher income, heavy
purchasing populations do use television for their marketing
activities, but marketers who choose to use television as their
primary marketing vehicles tend to need to reach everyone (or
virtually everyone). To that end, lower income consumers matter,
as a low income household could potentially spend almost the same
amount of money on toothpaste as a higher income one. A low
income household may be just as likely to see a certain movie as
a higher income household.

“"Networks" are completely meaningless.We don't know or care which network owns the rights to a
show or where it was broadcast. The only question that's relevant
is whether it's available on Netflix,Hulu,Amazon, or iTunes. This means that one of the key
traditional "businesses" of
TV--the network--is obsolete.”

We would argue that networks as brands are not meaningless.
We agree that consumers will be loyal to specific programs (such
as the programs which tend to appear on broadcast networks and
which increasingly appear on cable) but they are also loyal to
genres of programming, and the networks which are synonymous with
those genres. So much of the consumption of cable programming in
particular can be a function of consumer association with a cable
network’s brand.

“The vast majority of money TV advertisers spend to reach
our household (~$750 a year, ~$60/month) is wasted,
because we rarely watch TV content with ads, and, when we
do, we rarely watch the ads.”

Short of an ethnographic and econometric study of the media and
purchasing patterns found in groups of households, it’s difficult
to assert with certainty what money spent on advertising is
wasted and what advertising is not. Companies such as TRA have
established methodologies to triangulate between viewing data and
purchasing data and would be able to provide a broader statement
of whether or not households fitting a certain profile directly
purchased goods. More importantly, television is not now and is
unlikely to become any time soon a “one-to-one” medium. The
delivery of television is most efficiently provided on a
“one-to-many” basis. This means that there will inevitably be
some advertising which is wasted under any circumstance. The
question will always be whether or not a marketer had a better
alternative available to accomplish the goal they were seeking.

“The vast majority of money we pay our cable company for
live TV (~$1,200 a year / ~$100/month) is wasted,
because we almost never watch live TV and we can get most
of what we want to watch from iTunes, Netflix, Hulu, and Amazon.”

The vast majority of households do watch live television. Network
TV in particular can still reach virtually the entire population
over the course of a given month. This underpins its appeal when
marketers establish their plans. No other medium can come close
to this level of reach, and none approaches it for frequency
either. These are the two primary metrics marketers use to
establish their media budgets.

“The traditional "network" model is likely to break down
and be replaced with far larger "libraries" of content and far
more efficient content production, acquisition, and
distribution.”

The network model will persist in large part as a function
of retransmission consent rules which will ensure that it is
possible for a grouping of local radio-frequency licensees to
oblige MVPD (cable, satellite and telco providers) to carry
certain programming. With the associated economies of scale,
these groupings (what we’re calling broadcast networks) will be
able to continue to afford to produce the broadest reaching and
most broadly appealing content. If retransmission consent rules
change, the model may change too.

“The cost of traditional pay TV will have to
drop--users will have to get more for less, or they'll stop
paying for much at all.I might value the TV
content we get through our cable company at $20 a month--about
1/5th of what we pay for it. Eventually, as soon as I can figure
out ways to get the few sports I watch another way, we'll stop
paying the $100.”

The value of traditional pay TV will not have to drop at
least for as long as consumers continue to exhibit a preference
to take today’s multichannel video services as they exist today
and for as long as a la carte programming access rules are not
mandated. Most importantly, expenditure-sensitive consumers will
continue to access basic broadcast signals (because MVPDs are
obliged to carry them) and then certain broad reaching networks
will be those which are next packaged together for consumers.
These will be the networks that advertisers will continue to
concentrate their budgets on.

“Cable TV ratings over the past year have dropped
sharply”

Ratings for collections of individual networks may have fallen
but consumption of the medium has not fallen in a statistically
significant way. Ratings (important for short-term monetization
at a specific network) and consumption (important for the
meidum’s long-term health) are not necessarily the same thing.

-The percent of people worldwide who watch TV at least
once a month dropped from 90% to 83% over the past year.

-The percentage of people who watch video on a computer
once a month--84%--is now higher than the percentage who watch
TV.

Self-reported data such as that described above (according to the
underlying source of the Nielsen survey) should never be relied
upon, as it is inherently a flawed way to measure media
consumption. Socially preferable answers are inevitably provided
under the best of circumstances and are reflected in the
disparities between measurements of self-reported consumption vs.
passively measured consumption which are widely known by the
media research community.

It’s also worth noting that the underlying survey this data
references is both a global survey and one which only surveyed
online consumers. These flaws collectively render the data as
functionally useless.

We think the debate around these issues provides a useful forum
to better understand the industry and its evolution. To that end,
we welcome your comments and questions about these or other
related topics.